Motley Fool: June 15, 2013

Q: Where can I learn about which companies are doing right by their employees, their communities, the environment and so on? — L.D., Houston

A: Check out the annual list of “Best Corporate Citizens” published by CR Magazine, which focuses on corporate responsibility. Its Top 10 honorees for 2013 are AT&T, Mattel, Bristol-Myers Squibb, Eaton, Intel, Gap, Hasbro, Merck, Campbell Soup and Coca-Cola Enterprises. (Find the entire list at thecro.com.)

The folks at ethisphere.com have named the “World’s Most Ethical Companies.” The 2013 list includes 145 companies, such as Alcoa, Deere, eBay, Ford, General Electric, Kellogg, Marriott, Microsoft, National Grid, PepsiCo, Safeway, Target and Sherwin-Williams.

Learn more about socially responsible companies and mutual funds that focus on them at sites such as socialfunds.com, csrwire.com and ussif.org. Or read “Socially Responsible Investing for Dummies” (For Dummies, $25) by Ann C. Logue.

Q. My stock profits have shrunk by a lot recently. Should I sell and keep the cash in case the Dow crashes, thereby grabbing some bargains? — K.M., Evanston, Ill.

A. If you do and the Dow does crash soon, you’ll be well positioned to profit. But what if it just keeps rising for a long while? You’ll miss out on a lot of gains. No one knows what the market will do in the short run. In the long run, it tends to go up.

You should keep any money you’ll need within the next few years out of stocks, since a crash can happen at any time. Otherwise, it’s often best to remain in the market and to try to add to your holdings when it sinks. If you’re not comfortable in stocks, though, sell some or all of them.

Fool’s School

ETFs May Be For You

You may want to add some exchange-traded funds (ETFs) to your portfolio — once you know what they are.

ETFs are kind of like mutual funds that trade like stocks. Many are index-base, permitting you to be invested instantly in the securities that make up that index. Here are the ticker symbols for a few ETFs of major indexes: S&P 500 (SPY), the Nasdaq 100 (QQQ), Total Stock Market (VTI), Dow Jones Industrial Average (DIA), Russell 2000 (IWM), iShares MSCI Japan Index (EWJ), Barclays Aggregate Bond (AGG).

Often sporting low fees and tax-efficient infrequent trading, ETFs offer easy diversification. They’re also among the least time-consuming of all investing strategies. If you want to manage some or all of your money passively, ETFs can provide significant advantages.

Like stocks, ETFs can be shorted, optioned and margined. This isn’t necessarily a good thing. ETFs are almost too easy, and as a result, they have been used extensively as short-term investments, the complete antithesis of index investing. John Bogle, the father of index investing, once likened ETFs to a shotgun, saying, “They can be used for self-defense, or they can be used for suicide.” Trading in and out of ETFs eats up any cost benefit by racking up trading costs. (Trading in and out of any stocks rapidly can also hurt your performance.)

ETFs are not always great for those who dollar-cost average, investing small sums systematically to build up a portfolio. Since you invest in ETFs like stocks, through your brokerage, you pay trading commissions to do so. Thus, dollar cost averaging with small sums can be costly. Still, if you want to invest a modest sum in a broad index, you can buy a few shares of it via an ETF.

Before buying any ETF, read up on it to understand exactly what its holdings and fees are. To learn more about ETFs, click over to fool.com/etf or morningstar.com/Cover/ETFs.aspx. You can see some ETFs (and mutual funds) we’ve recommended via a free trial of our “Rule Your Retirement” newsletter at ruleyourretirement.com.

Foolish Trivia

Name That Company

Founded in 1982 and based in San Jose, Calif., I may conjure images of buildings made from sun-dried earth. I’m a high-tech company, though, with one of my main products named after a common circus performer. More than 90 percent of creative pros use my photo-editing software, and more than 5,000 top global brands rely on my digital marketing solutions. I employ more than 11,000 people around the world, and I generate about half my revenue abroad. My stock has gained about 12.4 percent annually, on average, over the past 20 years. I rake in more than $4 billion annually. Who am I?

Soon after becoming addicted to the financial channels, I began to invest in stocks beginning with the letter A because they appeared most often on the moving horizontal screen below. For several years I did much better than most funds and indexes, but lately I’ve really gotten battered. I’ve recently considered moving away from a vowel to one of the harder consonants, those with a Scrabble tile value above seven. Your thoughts? — C.S., Patagonia, Ariz.

The Fool responds: Considering that most stock mutual funds that are managed by pros underperform the overall market, it’s not surprising that somewhat random stock picks can do relatively well. The Wall Street Journal famously pitted professional stock pickers against a set of stocks chosen at random (in theory by darts aimed at stock listings) — and the darts did surprisingly well. When it comes to your hard-earned dollars, though, it’s best not to gamble so much. Many of us would do well to just invest in the broad-market indexes (such as S&P 500-based or whole-market-based ones) that tend to beat the pros.

The Motley Fool Take

Copy This

It might not be obvious to the casual observer, but at recent levels, Xerox (NYSE: XRX) stock offers one of the best values in the information technology industry.

Its price-to-earnings (P/E) ratio was recently 9.7, well below its five-year average of about 18. And, with its low valuation comes a hefty dividend yield, recently at 2.6 percent. Clearly, few are expecting the stock to do much over the next few years, with earnings projected to grow by 6.7 percent annually over the coming five years. But low expectations might actually turn out to be good news for investors in Xerox, as it gives the company a low hurdle to clear.

Its future is promising, as Xerox has been moving away from a hardware focus and ringing up lots of long-term service contracts, many with the federal and state governments. Xerox is generating a lot of cash from its business, too. Its free cash flow yield shows a company creating 17.4 cents of cash profit for every dollar invested in it.

Xerox may ultimately use its cash to pay bigger dividends, to buy back shares (increasing the size of your stake in the company for every share it takes off the table) or to reinvest in its business and maintain its lead over rivals for years to come. Give it some consideration.